China Ink, Energy & Resources

A negotiated retreat

The China Iron & Steel Association (CISA) has struck a deal with Australia’s Fortescue Metals Group for a new contract iron ore price

A negotiated retreat

A success for the Chinese negotiators?

The agreed price is 3% below that set in earlier negotiations between Asian steelmakers and Fortescue’s Australian rivals BHP and Rio Tinto.

But the local press isn’t over-impressed. The People’s Daily Online sees the final outcome (a 36% reduction on last year) as a backing-down from the initial demand for a 45% cut. Caijing magazine regards it more as a face-saving gesture than a good business deal. And the China Daily cautions that smaller mills have borne the real price of the failure to make a breakthrough, by having to buy on the spot market throughout the period in which CISA refused to compromise.

CISA now faces ridicule for its “brazenly arrogant, incompetent” performance, says The Australian. In fact, the Association looks “seriously dopey” for failing to accept a regional benchmark of $61 per tonne for so long, especially as spot shipment prices have doubled in the meantime to $110-plus.

But things are at lest moving forward?

CISA says the deal is a major step towards achieving a unified, reference price from other suppliers in future negotiations.

But the Global Times seems to doubt it, wondering instead if CISA is not “on the ropes”. It also reports Western media speculation that the industry association may lose its lead negotiating position for the Chinese side.

Not really, says Malcolm Maiden at the Melbourne Age. Rio was quick to assert that any deal that CISA had agreed was with Fortescue alone, and that it would be sticking to its previously agreed offer (a 33% cut). For the time being at least, the contract will only provide a small part of China’s vast iron ore requirement, the Financial Times points out. Under the terms of the deal, Fortescue plans to provide 3.3 million tonnes a month. But in July China imported 58 million tonnes.

So who is the biggest winner?

The relationship with Fortescue seems to have been strengthened; the company sells all of its ore to China and was thus “born to cater to the Chinese market,” noted Time Weekly.

But there is “no free lunch” for CISA, warns the Global Times, as the deal is conditional on a loan package of up to $6 billion for Fortescue from state coffers.

Other newspapers wonder if CISA’s difficulties mean that the country’s leading steelmaker Baosteel will be returning to a more prominent role in future negotiations.

Fortescue may come off best from the situation, agrees the Financial Times. Beijing has guaranteed it “priority” in next year’s annual price talks – a spot previously reserved for the largest ore miners.

Plus, with the financing on offer, the company is also in a stronger position to expand its assets, increase its output, and begin to close the gap on its bigger rivals. A glimmer of longer term hope then for the Chinese that Fortescue will provide vital competition to the Rio BHP joint venture agreement, says The Australian.

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